COMMUNITY PROPERTY WITH
RIGHT OF SURVIVORSHIP . . .
A NEW FORM OF TAKING TITLE!
There are several ways in which borrowers typically take title when
purchasing property. The two most common ways for married couples to take title
has been either as Community Property or Joint Tenancy.
Historically, spouses in California
had been advised that in order to avoid the time and expense of probate
proceedings, they should hold title to their property in joint tenancy. When so
held in title, the property automatically passes to the surviving spouse
without requiring the administration in probate. In addition to not having to
pass through probate, joint tenancy's right of survivorship can not be altered
Often, however, taking property in Joint Tenancy may not be the most
desirable option for tax reasons. Under joint tenancy, each spouse is presumed
to own one half of the property. Upon the death of one, the surviving spouse
obtains a "step up in the basis" of only one-half of the value of the
property as of the time of death.
As an example, assume the purchase of a property at $100,000. Each spouse is
presumed to have a half interest or $50,000 of value. Years later, at the death
of one spouse, the property is worth $200,000. Each spouse is still presumed to
own a half interest or $100,000 each. Here, then, is the tax consequence . . .
The deceased spouse's half value is "stepped up in basis" to the
current market value of $100,000. The remaining spouse, should s/he decide to
sell the property, could owe taxes on the $50,000 of value that escaped the
"step up". (Recognize that present capital gain rules render this
concern moot except for possibly higher sale value homes – over $750,000).
Community Property, as a form of ownership, allowed a surviving spouse to
profit from a full "step up in basis" upon the death of their spouse.
Thus, from a tax standpoint, an immediate sale of the property would result in
no capital gain tax consequences.
Current law provides, for all title instruments created on or after July 1,
2001, spouses may choose to take title to property as "community property
with right of survivorship". In essence, this new form of ownership
provides the probate avoidance benefits of joint tenancy and the tax benefits
of community property.
It is important to note that this new form of ownership requires the
signature or initials of the parties on the face of the document or on some
other document to demonstrate the clear intention of the parties to take the
identified property as community property with right of survivorship.
The reason for this requirement for affirmatively requesting this new form
of ownership stems from the often misunderstood concept known as the
"community property presumption". Most commonly presume that property
acquired by spouses during marriage and which is held in joint form, is
community property. This presumption, however, applies only for purposes of
division of property upon dissolution of marriage or legal separation. If one
party dies, the language of how title is held in the deed is controlling, not
the community property presumption. So, while people are often under the
misperception that because they acquired a home during marriage, the home will
be treated as community property with the appropriate tax advantages, this is
simply not the case. The new law and new form of taking title is designed to
clarify both buyer options and intent of ownership.
Those who currently hold title in another form of ownership may wish to
consider changing to community property with right of survivorship. We
recommend, as always, that tax and/or legal counsel be sought prior to any
final decisions regarding change of title.
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